If you owned Caesars Entertainment, you could make a ton of money selling it piece by piece.
This seems fairly obvious in today’s investment climate, awash as it is in cheap capital and teeming with private equity funds and real estate investment trusts hungry for assets. We’ve seen this amply played out in the last couple of weeks when Caesars pocketed $516 million unloading the Rio Hotel and Casino just west of the Las Vegas Strip to a private real estate investor from New York.
Consider that in the U.S. alone, not counting overseas holdings and tribal gaming, at the start of 2019 Caesars owned or operated 33 casino hotels and racinos and related assets, and if you want to include it, a racetrack in Kentucky. Eight of these are smack-dab at the center of the Las Vegas Strip.
Arguably, this is what corporate raider Carl Icahn saw when he moved quickly from roughly January through March to buy his way into effective control of this massive portfolio.
In Eldorado Resorts, which just a few months later sealed a $17.3 billion deal for cash, stock and debt to take it off his hands at a tidy profit, it appears he found a savvy strategist that shared his vision.
Caesars is the capstone to a five-year buying spree that has seen Eldorado transform itself from a small, privately owned Reno operator into a publicly traded regional gaming powerhouse with 26 casinos in 12 states. Of course, it hasn’t coming cheap. El Dorado will be balancing roughly a $15 billion debt load when the Caesars transaction closes sometime in the first half of next year.
We don’t have to go back that far to see how something like this could go very wrong.
The last guys to tuck into a meal of this size—private equity giants Apollo Global Management and TPG Capital—were the ones who engineered a leveraged buyout of Harrah’s Entertainment that saddled what would shortly become Caesars Entertainment with some $21 billion of debt.
Then came the global financial crisis and the Great Recession. Nobody was gambling, nobody was vacationing, and it was all the Las Vegas-based large caps could do to remain solvent. MGM Resorts and Las Vegas Sands had Macau and Singapore to dig them out. Caesars didn’t. A lot of financial legerdemain ensued. Everything, it seems, but a badly needed sell-off. Ultimately, Caesars’ largest operating subsidiary had to be sheltered in U.S. Bankruptcy Court and the entire company went into a reorganization that took more than two years to complete. The share price would never fully recover; but when it was over, Apollo and TPG were gone; and the company finally had hit upon a way to begin stripping the latent value out of its sprawling holdings: a gaming/hospitality REIT, VICI Properties.
Which brings us back to Eldorado. If there’s anything that separates Caesars under Icahn and Eldorado and what befell it under Apollo and TPG—aside from the possibility of a luckier break in the larger economy—it’s this.
“To sell properties for cash is smart. What Caesars is doing now is what it should have been doing for the past 10 years,” says Steve Gallaway, managing partner of Global Market Advisors, which specializes in uncovering growth opportunities in gaming markets worldwide.
“Why do they need so many mid-level properties? They don’t.”
Gaming-REIT partnerships are nothing new. Penn National Gaming led the way in exiting the real estate business in 2013 with the creation of separately traded Gaming and Leisure Properties. MGM followed with MGM Growth Properties, which now owns all of its gaming real estate with the exception of Bellagio, MGM Grand, Circus Circus and the new MGM Springfield in Massachusetts.
Springfield is under an option to MGM Growth, while recent news reports have it that separate deals are in the offing for Bellagio and the Grand (to Blackstone Group, which is already on the Strip with the Cosmopolitan) and Circus Circus (to Phil Ruffin, who also is on the Strip with the TI, which he bought from MGM during the recession). Bloomberg Intelligence gaming analyst Brian Egger believes Bellagio and the Grand could fetch upwards of $7 billion as a pair. Estimates surrounding Circus Circus price it in the neighborhood of $850 million. That’s a lot of money, even for MGM. Then again, MGM has its sights on a $10 billion super-resort in Osaka, Japan.
“It’s simply that they have the opportunity to monetize the real estate and to fund expansion,” Egger explained in a recent interview with GGB News. “It’s about balancing competing objectives: to keep leverage within manageable levels and pursue Japan.”
Gallaway loves the Circus Circus deal, for one, as much for its sizable land bank as the cash cow of a casino (though one in need of some TLC) that sits on a portion of it. “It’s just a win-win,” he told GGB News. “A great development play. I don’t know how Ruffin can go wrong with that.”
Divesting non-core assets is a strategy in which El Dorado is well-versed. In essence, last year’s $1.9 billion deal with Icahn for Tropicana Entertainment was a partnership with Gaming and Leisure Properties in which GLPI acquired all the real estate except for a resort in Aruba (which was sold separately) and casinos in St. Louis and Lake Tahoe. Separately, deals have been struck to transfer two casinos in Pennsylvania to Churchill Downs. Isle of Capri Kansas City and Lady Luck Vicksburg have been sold to Twin River Holdings. A casino in West Virginia and two in Missouri have been sold to VICI, a deal El Dorado then capped off by selling its equity interest in the three to Century Casinos, a kind of double-dipping, if you will, that could prove very lucrative in their approach as future tenants of VICI’s growing portfolio on the Las Vegas Strip.
VICI owns 21 of Caesars’ casino hotels and racinos and has put/call options on two recently purchased racinos in Indiana, which can be exercised in a few years. It was announced recently that, as previously agreed, VICI will acquire Harrah’s New Orleans, Harrah’s Atlantic City and Harrah’s Laughlin for a combined $1.8 billion. This deal gets finalized with the closing of the merger with Eldorado, which means the money goes to the new owners. VICI already owns Caesars Palace and Harrah’s Las Vegas and has an agreement to acquire the Octavius Tower at Caesars Palace. It also has right of first refusal on Bally’s, Paris, Flamingo, the Linq, Planet Hollywood, Caesars Forum Shops and Horseshoe Baltimore, all of them contingent on completion of the merger. So, if they happen, that money goes to El Dorado too. That leaves one casino hotel on the Las Vegas Strip, the Cromwell.
For the most part then, Eldorado has embarked on this epic transaction not as an owner but as an operator and management company. Which implies that whatever they decide to sell𑁋and management has indicated they will be sellers; indeed, the debt load would seem to demand it𑁋it will be lease holdings on a big chunk of the center Strip and a regional portfolio that is still one of the largest and most diverse in the country.
What Gallaway sees in this is an enormous opportunity for a slew of private companies, many possibly new to gaming, and a range of smaller regional operators to get into the business or expand what they have.
As he puts it, “If you’re Eldorado you’ve got to raise money. Got it. So, what are you going to look at? How do I make these operations more efficient? And what properties, strategically, do we no longer need? Like the Rio. That’s ultimately why you do a REIT.”
It’s what Apollo and TPG didn’t quite get.
“If you’re in for the long haul,” he maintains, “you don’t want to be too big. El Dorado is in for the long haul.”
